Unpaid bills in Illinois now stand at $8.5 billion. Some project the total will reach an all-time high of $10.5 billion by December. Total accumulated liabilities counting pensions are on the order of $163 billion.

Illinois is flat out broke, and without a budget cannot legally pay some bills. In what I see as a sideshow, Illinois has not been paying lotto winners.

Far more serious issues are on the horizon. For example, the State Journal-Register reports Gov. Rauner threatens to halt health insurance payments to providers for state workers.

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Legislature Gets Paid

No matter whether the legislators do their job or not, they get paid. Their pay is guaranteed via a bill the legislature passed last year.

And in spite of the fact the legislature would not present a balanced budget for Rauner to sign, the legislature did pass a pay hike for themselves, in yet Another Insult to Taxpayers.

After last month’s posts, Illinois Vendors, Ask for Cash on the Barrelhead and No, Really, Illinois Vendors — Require Cash, we see there may be good news for vendors currently owed money from the state of Illinois.

They’re going to put it on the credit card:

“(Reuters) – Illinois would add $2.5 billion to its credit card balance to pay old bills–including $2 billion owed to Medicaid providers–under a bill pending before the House of Representatives.

“The bill, which has the support of powerful Democratic House Speaker Michael Madigan, underscores the unorthodox measures Illinois lawmakers are considering in the face of $9 billion in unpaid bills and a pension underfunding approaching $100 billion.”

Having to issue long-term bonds to pay operating expenses is a REALLYBADSIGN.

Long-term, general obligation bonds, from principles of sound finance, should be issued only for capital expenditures. Chances are pretty good that this backlog does not represent capital expenditures.

Now, issuing debt for operating expenses is not necessarily bad — if it’s short-term debt and it’s just a timing of cash flow problem. For example, I have a very lumpy cashflow stream in and out. I will have cash inflows twice the usual some months, and outflows (such as this month) much greater than usual. The fluctuations in the inflows and outflows do not match, so sometimes the credit card bills for groceries do not get paid off for a month or two.

But I’m not trying to refinance my current grocery bills with a 30-year loan.

That would be an indication I am living waaaaay beyond my means, and it would only be a matter of time until the debt gets to be too high to keep up with interest payments, much less payment of principal.

Have you ever seen an individual go through a bankruptcy spiral? It does look like this: a run up in their credit card bills (or other debt) as they can’t deal with current operational costs.

Contributions to pension funds are also current operational costs, but because these are contributions made to fund a cash flow that shouldn’t be occurring for decades to come (or is it? See below re: NJ)…that’s not seen as real.

But if you’re not paying dental bills and the like, people do realize that’s not something that one should be issuing 30-year bonds for.

It goes beyond a budget impasse — they have had this long-standing problem. It’s a spending problem, and they’ve got to start cutting.

Everyone, from elected leaders to pundits to financial experts to people on the street, has been talking about the pension crisis in Chicago, and the enormous, crushing debt the city faces. Just to maintain our current level of debt – not come anywhere near solving the problem – would take nearly half of the entire city budget, and that’s every year!

But what is astounding is the silence from those who are impacted the most, the leaders of the five major employee groups: teachers, policemen, firemen, municipal workers and laborers.

These labor leaders were eager to tout the court rulings supporting the interpretation that the Illinois Constitution guarantees those public employee pension benefits — period. But while the courts are opining and the unions are touting, the accrued liabilities are growing at the rate of 4.5 percent every year, and the plan assets are wasting away because benefit payments far exceed contributions and earnings.

There is no victory, nor is there a solution to save these funds anywhere to be found in the court decisions or subsequent actions of political leaders. Why are union leaders complacently playing the fiddle while Chicago burns around them?

Because the pensions will always be paid! Right?

Government doesn’t go out of business! The money is always there!

I have one proposed change to the piece:

Perhaps they plan to be comfortably retired when crunch time comes. Or maybe they hope that by keeping their heads in the sand, no one will ask them to compromise, to sacrifice some for the benefit of all, or to change a clearly broken system for future public employees. I’m not sure what to call it, but it certainly isn’t leadership.

Change that bolded bit to “Perhaps they hope they will be dead”. That’s their best hope.

The Scheduling Order in Berg v. Christie came out today with the New Jersey Supreme Court setting December 14, 2015 as the date when all briefs are to be filed meaning that we could see oral arguments around February and a decision by May, 2016.

Though something Chris Christie said on Meet the Press last Sunday could mean that even if Cost-of-Living-Adjustments have to return we may be in a Bleak-House scenario where the money for them will all be gone.

….

…as many of my cheerily benighted public sector friends keep telling me, no [pension] payment [to retirees] has ever been skipped (reduced by COLA removal yes, but never skipped). So why is Chris Christie bragging about still being able to keep making those payments? Isn’t there $79 billion in the fund with $5 billion in contributions coming in annually? Are we that close to pay-go?

Warning: wild speculation ahead with absolutely no proof behind it outside of experience with deceitful government bureaucracy:

With the stock market tanking and all that money in alternative investments I see Christie going to his pension people and asking for an update on the status of the plan and being told they can still ‘pay the bills’…but for how long? I sense they are playing games with the asset values (even beyond what you would expect from alternative investments) and we are not far from being told that the pension assets have been madoffed.

This is one of the things that has got me worried about the huge increase in use of “alternative” asset classes by public pensions.

But this is one of the big issues with private equity/hedge funds, and it’s not just the outsize fees: it’s that there’s no good market value for these illiquid investments. Their value is whatever you say it is until suddenly it’s not.

Just as in the case of the value of pension liabilities, which come apparent over time, the actual value of these illiquid investments also become apparent over time, especially when they fail.

US-based public pension funds have become the biggest source of capital for hedge funds, beating out endowments or foundations, according to Preqin.

These funds are increasingly investing in the asset class, the report said, accounting for approximately 16% of the total institutional capital allocated to hedge funds.

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Not only has the number of US-based public pension funds with stakes in hedge funds increased—from 269 last year to 283 currently—the amount these funds are investing is also up. Year-on-year increases in mean hedge fund allocations rose from 7.2% at the end of 2010 to 8.8% at present.

These increases are in keeping with the results of a survey published in March by KPMG, the Alternative Investment Management Association, and the Managed Futures Association, which predicted corporate and public pension funds would become the primary source of capital for hedge funds by 2020.

Chicago Public Schools, or CPS, is facing a pension shortfall of $9.5 billion, multiyear, billion-dollar deficits and a credit rating that’s been downgraded to junk. This crisis is arguably the best example of how Illinois politicians use and abuse pensions, turning what is meant to provide government workers with retirement security into a political slush fund.

From pension spiking and pickups to double dipping and skipped payments, pension systems have been co-opted by the corruption and political trading for which Chicago politicians are famous.

The current narrative is that historically CPS didn’t have enough money to fund both teacher pensions and the classroom – that it had no choice but to shortchange pensions.

But a close review of the school district’s finances over the past 20 years finds that revenues never were the issue; Illinois and Chicago taxpayers contributed more than enough money to pay for both, had the funds just been properly managed.

In fact, taxpayer-provided CPS revenue has more than doubled to $5.3 billion since 1997. When measured in per-student terms, CPS revenues grew at more than 1.5 times the rate of inflation during that time period. Despite those growing revenues, CPS leaders have brought the teachers’ pension fund to the brink of insolvency. Now they’re counting on taxpayers to clean up the mess; but taxpayers shouldn’t be forced to bail out a retirement system that’s been corrupted into a political tool.

…..CPS officials – with the consent of the General Assembly – enacted a 10-year “pension holiday” that diverted more than $1.5 billion in taxpayer dollars away from pensions and toward school operations, most notably to salaries.

In 1999, the system was fully funded. But by 2006, those skipped pension contributions coupled with a weak stock market created a $3.1 billion shortfall.3

Even though the pension holiday added billions of dollars of debt to the pension fund, CPS resorted to the same pension-holiday scheme again in 2010, diverting yet another $1.3 billion from teacher pensions over a three-year period.

With much of the state’s financial crisis being blamed on under-funded public pensions, wouldn’t it be great if ordinary taxpayers could see exactly what condition the funds they support are in?

Alas! The Illinois Department of Insurance (DOI) has created an online public pension portal with annual statements of pension funds for the entire state of Illinois.

A review of police and firefighter pension funds for the most recently available annual reports in four Madison County municipalities – Collinsville, East Alton, Edwardsville and Granite City – shows that most funds have recently operated in the black, thanks mainly to municipal tax levies and investment income.

But it also shows that retirees or beneficiaries take out a lot more compensation than they put into pension funds.

A press release issued by the DOI on Tuesday says the online portal offers easy access to information regarding a participant’s pension benefits. Currently, it lists only police and firefighter pension funds. However, more documents will gradually be made available in the coming months, the DOI says.

Okay, it doesn’t have everything I want yet, but I look forward to getting my hands on some grubby grubby data.

How does this sound for pension reform? Pass a law forcing taxpayers to automatically fully fund them in whatever-it-takes amounts. That’s what a guest piece in Crain’s called for this week. It did that by holding up, as a model to be replicated, IMRF — the Illinois Municipal Retirement Fund.

IMRF, you see, is unique in Illinois because it has that forced taxation funding. Municipalities must raise property taxes in amounts required to keep the pension up. Consequently, it’s much better funded than other pensions at 87% (though it uses the same optimistic assumptions as many others, like a 7.5% rate of return and a 3.5% payroll growth rate despite — despite Illinois’ declining population).

IMRF also uses that forced tax to “guaranty” 7.5% annually on a savings account offered only to its members, and a special “13th payment” each year for its members. We wrote about those in an earlier article.

IMRF is a big part of why so many municipalities in Illinois are growing broke. By forcing up property taxes usable only for that pension, it siphons tax dollars away from public services. It also crowds out capacity to fund municipal pensions for police and firefighters. Actually, maybe we would be better off if all pensions did have IMRF’s funding scheme because we would have seen long ago how unaffordable pension promises are and they would have been reformed then.

And the automatic taxation will continue until it doesn’t. Take a look at the Illinois bills problem above.